Sometimes taxpayers are on the fence, and they’re not sure what they want to do when selling property. What if you want to cancel your 1031 exchange after the process has started?

Keep your Options on the Table

If you’re on the fence I suggest keeping all available options on the table. If you sill your property and take the cash, you’re going to have to pay the taxes. So rather than take the cash, set up the 1031 exchange and use the first 45 days (the identification period) to evaluate your options and see if you want to designate any replacement property. During those 45 days you can decide if you want to continue with the 1031 or not. If you don’t identify any replacement property by midnight on the 45th day, your exchange will fail and your QI should return the funds to you on the next business day.

After the 45 Day Identification Period

If you want to keep your options open after the 45th day all you need to do is make a valid written identification of what your replacement properties may want to purchase and then use the remaining 135 days to do your due diligence. You are still in the driver’s seat and can decide if you want to close on those properties. If you do you can use your exchange funds at any time to acquire the identified property. If you don’t want to close on them, it’s not a big deal. All you need to do is wait until the end of the 180 day period and receive your unused exchange funds at that time.

Contingency Identifications

Sometimes taxpayers want to make an identification with a material contingency. For example, you can identify a property but state that you don’t want to buy it unless it’s re-zoned commercial by a specific date. If the property is not rezoned by that specified date then the identification is void. The beautiful thing about making a contingent identification is that it gives you the option to fold up your tent and terminate your exchange if the contingency doesn’t occur.

Here’s a note though – you can’t make it contingent upon your negotiating a purchase price with the seller because that’s a contingency that’s in your control. You could just negotiate in bad faith and make the contingency not occur. The contingency has to be something that’s out of your control like getting a permit approval or zoning control.

1031 Hotline: If you have questions about cancelling 1031 exchanges, feel free to call me at 612-643-1031.

Meet Jeff

Jeffrey Peterson is the president of Commercial Partners Exchange Company, LLC. He received both his B.A. and his J.D. from the University of Minnesota, and is a member of the Minnesota State Bar Association and the Tax Section of the American Bar Association.

CPEC1031 is located in Minneapolis, Minnesota and provides nation-wide 1031 qualified intermediary services including the following areas: Minnesota, Wisconsin, North Dakota, South Dakota, Florida, Texas, Iowa, Boston, New York, and California.